Following lengthy negotiations, the global financial regulation authorities meeting at the Basel Committee took note, in the late afternoon of Thursday 7 December, of the finalisation of the so-called ‘Basel III’ framework, when they approved prudential standards agreed upon at international level on requirements for capital that must be held by banks to cover the risks to which they are exposed.
“Today’s endorsement of the Basel III reforms represents a major milestone that will make the capital framework more robust and improve confidence in banking systems”, Mario Draghi, the chairman of the group of governors and heads of supervision, said in a press release.
The standards adopted introduce standardised approaches to the most risk-sensitive credit risk and an entirely new standardised approach to the operational risk (Standardised Measurement Approach), which replaces the existing methodologies.
The use of internal models is, furthermore, limited by the introduction of lower specific limits on the input parameters of the Internal Ratings Based approach and removing the possibility to use internal models for operational risk.
On the controversial issue of the revision of the minimum capital requirements (‘output floor’), it was ultimately decided to set a threshold of 72.5%, calculated on an aggregate basis across all risks. Readers may recall that this was the major stumbling block between the Europeans, who were calling for a threshold of 70% with different accompanying measures, and the Americans, who dug in their heels over a threshold of 75% (see EUROPE 11810). The new rules will apply from 1 January 2022 and will be phased in over a period of five years.
“It is now essential that all major jurisdictions implement all implements of this agreement”, said the European Commissioner for Financial Services, Valdis Dombrovskis, in a press release. Indeed, for these new rules to become genuinely binding, they must first be transposed into the legal orders of the various member jurisdictions of the Basel Committee.
For the EU, the implementation of the agreement will require changes to the current banking rules, including the capital requirements regulation (CRR). Moreover, the Commission has announced that before any changes are made to the European legislation, it will carry out an in-depth consultation and an impact analysis to assess the consequences of this agreement on the EU’s economy.
In a press release, the European Banking Federation stresses the need for a thorough evaluation of the impact of this agreement on the economy and banking sector, expressing concerns that the costs of these measures for the EU economy as a whole could outweigh its benefits in terms of financial stability. (Original version in French by Marion Fontana)